Answer to Question #311532 in Sociology for jkkk

Question

briefly discus some of the major effects this may have on a given economy.

Answer 1

The following points highlight the six major effects of inflation. The effects are: 1. Effects on Distribution of Income and Wealth 2. Effects on Production 3. Effects on Income and Employment 4. Effects on Business and Trade 5. Effects on the Government Finance 6. Effects on Growth.

1. Effects on Distribution of Income and Wealth: The impact of inflation is felt unevenly by the different groups of individuals within the national economy—some groups of people gain by making big fortune and some others lose.

2. Effects on Production: The rising prices stimulate the production of all goods—both of consumption and of capital goods. As producers get more and more profit, they try to produce more and more by utilizing all the available resources at their disposal.

3. Effects on Income and Employment: Inflation tends to increase the aggregate money income of the community as a whole on account of larger spending and greater production. Similarly, the volume of employment increases under the impact of increased production. But the real income of the people fails to increase proportionately due to a fall in the purchasing power of money.

4. Effects on Business and Trade: The aggregate volume of internal trade tends to increase during inflation due to higher incomes, greater production and larger spending. But the export trade is likely to suffer on account of a rise in the prices of domestic goods. However, the business firms expand their businesses to make larger profits.

5. Effects on the Government Finance: During inflation, the govern­ment revenue increases as it gets more revenue from income tax, sales tax, excise duties, etc. Similarly, public expenditure increases as the government is required to spend more and more for administrative and other purposes.

6. Effects on Growth: A mild inflation promotes economic growth, but a runaway inflation obstructs economic growth as it raises cost of develop­ment projects. Although a mild dose of inflation is inevitable and desirable in a developing economy, a high rate of inflation tends to lower the growth rate by slowing down the rate of capital formation and creating uncertainty.